The Medici Bank

The Medici Bank, perhaps the most famous bank of Renaissance Italy, rose to the top rank of European financial institutions during the fifteenth century. It accepted time deposits, the sum of which was several times larger than the invested capital, and was a lending institution. This was unlike some of the exchange banks of the time that were primarily involved in fund transfers associated with international trade. The Medici Bank was the chief bank for the Curia, and it had branches in the major cities of Italy, as well as London, Lyons, Geneva, Bruges, and Avignon.

In Renaissance Italy openly charging interest (usury) was prohibited, but interest charges were hidden in bills of exchange through which foreign currency was purchased for delivery at a future date. Profit was at the mercy of the foreign exchange markets. What was called a dry exchange involved no transfer of goods or foreign exchange and effectively guaranteed interest to the lender. In 1429 dry exchanges were outlawed in Florence, but the law was suspended at least temporarily in 1435, right after the Medici became the de facto, if not legal rulers, of Florence. The Medici Bank was organized as a partnership with the Medici family being the largest investor in the parent company and the parent company being the largest investor in the branch partnerships. The parent company functioned like a modern holding company. The system of branch banks was organized such that one branch could be declared independent by rearranging accounts. Such arrangements protected the parent bank from the bankruptcy of individual branches due to localized economic difficulties.

Members of the Medici family entered the Florentine banking business in the latter 1300s. In 1393 Giovanni di Bicci de’ Medici (1360–1429) took ownership of the Roman branch of a bank owned by one of his Florentine cousins. He removed the headquarters of his bank to Florence in 1397, the official founding date for the Medici Bank. At the time Rome was a source of funds, whereas Florence offered a better market for making loans. By 1402 the Medici Bank had opened a branch bank in Venice, another important outlet of investment opportunities. By then the bank boasted a total of seventeen employees at its headquarters in Florence, five of whom were clerks.

In the fourteenth and fifteenth centuries wool and cloth industries were the export mainspring of the Florentine economy. In 1402 the Medici Bank loaned 3,000 florins (nearly one-third of its original capital) to finance a Medici family partnership to produce woolen cloth. The year 1408 saw the establishment of a second and more successful shop for producing woolen cloth. In addition to banking, the Medici traded wool, cloth, alum, spices, olive oil, silk stuffs, brocades, jewelry, silver plate, citrus fruit, and other commodities, diversifying their risks by investing in a range of ventures.

In 1429 Giovanni di Medici died, passing the management of the bank into the hands of his eldest son, Cosimo. Under Cosimo’s leadership the Medici Bank became the largest banking house of its time. In 1435 the bank opened a branch in Geneva, the first branch beyond the Alps. The Medici opened another woolen cloth manufacturing shop and acquired a silk shop in 1438. The Medici Bank opened a branch in Bruges in 1439, and branches in London and Avignon in 1446. The Milan branch was opened in 1452 or 1453. The Geneva branch was transferred to Lyons in 1464.

When Cosimo died in 1464 the bank had passed its peak. An invalid son, Piero de’ Medici, assumed management of the bank. According to Machiavelli, he began calling in loans, causing a contraction in credit and numerous business failures. Piero died in 1469. Piero’s son, Lorenzo the Magnificent, was a great statesman. He had a humanistic education without business training or experience. He turned the management of the bank over to managers, and the bank gradually lost ground. On Lorenzo’s death in 1492, his son, Piero di Lorenzo, assumed control of the Medici political and business interests in Florence. Piero had neither business nor political acumen, and in 1494 the Medici were ousted from Florence. The bank, already tottering on bankruptcy, was confiscated, and was not successful under its new owners.